The purpose of this article is to make
lawyers aware of one of the best software programs which can be designed
to keep track of every client trust transaction, produce reports required
by the standards adopted by the Board of Governors, and perform monthly
bank reconciliations.

Suppose
you receive a phone call from a California State Bar investigator who informs
you that your bank has notified the State Bar that a check on your clients'
trust account has been returned because of insufficient funds. The investigator
now wants to review the records of your client trust account to determine
whether you are in compliance with the current rules. Will you be able
to provide up-to-date reports for every penny of client funds for which
you are personally responsible?

The new Trust Account Record Keeping
Standards for Client Trust Accounting which became effective January 1,
1993, need not create alarm or cause stress to the solo practitioner or
to the small law firm who do not employ a full time bookkeeper to maintain
their trust records. New accounting software is both affordable and relatively
easy to learn and can be designed with a minimum of effort to produce the
reports required by State Bar Rules of Professional Conduct Rule 4-100.

The purpose of this article is to
make lawyers aware of one of the best software programs which can be designed
to keep track of every client trust transaction, produce reports required
by the standards adopted by the Board of Governors, and perform monthly
bank reconciliations. Maintaining these records in the computer and on
backup medium provides the added assurance that this vital information
will be available for the five year period of retention (from the date
of the last disbursement) and can be reproduced on printed media within
a matter of minutes.

We recommend that every attorney
who handles clients' trust funds obtain a copy of the "Handbook on Client
Trust Accounting for California Attorneys," published by the State Bar
of California in November 1992. The Handbook clearly explains every phase
of client trust accounting and provides excellent examples of the reports
required. Also, you should consider obtaining a copy of the August '94
Law Practice Management Review tape just published by Edward Poll (described
in this issue) which contains an interview with Judge Ellen Peck of the
State Bar who explains the requirements of maintaining client trust accounts.

Rule
of FiveIn a nutshell, the minimum trust
record requirements is summarized by the "Rule of Five" (See Handbook
on Client Trust Accounting for California Lawyers page 48.):

1) A written "ledger" for
each client, setting forth the name of the client and identification of
the bank account, the dates of each activity, the amounts received and
from whom, the amounts disbursed and to whom, and current balances of funds
for each client, each month, or as of any date the report is required;

2) A written "journal" for
each client trust account, identifying the name of the account (including
the bank and account number), the date of each transaction, each debit
and credit to the account, the names of the sources of each deposit and
the names of each person receiving a payment, and the current balance in
the account;

3) Copies of all bank statements
and canceled check for each client trust account;

4) Monthly reconciliation
of each of the above items.

5) A Journal of other properties,
such as securities, jewelry, valuable coins, art, etc.

QuickBooks
for Windows

This article will focus on QuickBooks
for Windows although the DOS version works the same way. QuickBooks is
a very simple well supported accounting software package. It is very flexible
in allowing multiple applications of accounting for a wide variety of businesses.

QuickBooks will save you time because
most information such as payees and sources of settlement funds are entered
only one time. The next time you write a check to a payee the name pops
up automatically as you type. The program automatically records their name
and address so that mailing labels can be generated. If you bill for services
on an hourly basis you will be able to take advantage of the accounts receivable
and invoicing system included in the package. There is also a payroll package
available to take care of payroll processing needs.

The advantage of QuickBooks is that
you are able to write checks and record deposits directly on the computer
and at the same time record all other aspects of the transaction automatically.
By printing the Client Ledger Report in advance of disbursing the checks,
and by obtaining your client's signature on the report, you will avoid
client conflict and possible overdrafts on your client trust account.

The reporting abilities are amazingly
flexible and allow you to filter information in the reports based upon
multiple criteria you specify. You can immediately generate up-to-date
reports for your entire trust account journal and individual client ledgers
whenever your client or the State Bar calls for the information. Bank reconciliation
reports must be printed each month when the reconciliation is performed
and cannot be easily called up for reprinting without considerable effort.
Also QuickBooks does not require extensive accounting knowledge, but basic
computer and accounting skills will be necessary to set up the books, maintain
them and issue the reports required.
Although a number of good computer
software programs are available to assist you in doing client trust accounting,
QuickBooks by Intuit stood out as the most flexible and inexpensive program
and is available for DOS and Windows. We have spent a number of hours setting
up a set of books to maintain client trust accounts using QuickBooks and
have confirmed with Intuit and knowledgeable experts on trust accounting
that using the formatting which we will describe here briefly will produce
all of the reports and maintain all of the records which are required by
Rule 4-100. Further, we have prepared a detailed instruction manual and
template which will allow you to immediately commence inputting of data
and generate reports without having to spend several hours experimenting
with different formats. (We will explain how you can obtain this information
at the end of this article.)
A
Word of Caution

Client trust accounting is a non-delegable
personal responsibility of the attorney. Although you may use staff to
assist you, the attorney who receives clients trust funds bears all of
the responsibility to account for every penny. QuickBooks is a valuable
tool to make this obligation easier and more efficient to fulfill. However,
you must take the time to learn how the program works. QuickBooks has excellent
instruction manuals and helpful support staff. No matter how good the program,
as with any other computer program -"garbage in equals garbage out." Entering
data must be done precisely, each entry must be properly categorized, otherwise
you cannot get the reports required. If done properly, entry of data need
only be entered once (with a few exceptions) and then you will always be
able to obtain current up-to-date reports to satisfy all State Bar requirements
in a matter of minutes.

Accounting
Theory

Client funds held in trust are a
liability of the law firm to the client. These are balance sheet transactions
not income and expense transactions. For example, funds received in settlement
of a personal injury case are credited to the client's liability account
and are not income of the law firm until services are performed and invoiced.
Therefore, the accounting records of the law firm should reflect two additional
accounts in the law firm chart of accounts. The first account is a bank
account entitled: Cash in Bank - Client Trust. The
second account is a liability account entitled: Client Trust Liability.
In QuickBooks a separate sub-account will be set up under Client Trust
Liability for each client matter in which funds will be held in trust.
This creates a separate ledger for each and every client matter in further
compliance with Rule 4-100.

The important concept here is that
the client funds held in trust must be kept in an entirely separate bank
account and can not be commingled with other law firm funds. However, the
record keeping for client funds will be based solely upon the activity
in the client trust bank account(s) and will produce totally separate accounting
records just for the trust funds. (It is also possible to set up the entire
trust accounting as a separate company, which will only account for the
client trust transactions. If you set up the client trust accounting as
a separate QuickBooks company the client trust bank account and liability
account will not appear on the law firm financial statements. The separate
company setup is not required by the State Bar, but may be useful if you
want to separate the duties of the law firm accounting from the client
trust accounting.)

Summary
of Tasks

Receiving Funds

When
you receive funds in trust you record the date, name of the deposit source,
deposit amount, and breif memo (e.g. Full Settlement) directly in the check
register for the client trust bank account. QuickBooks provides a pop up
window ("Edit/Split") to enter the details of the deposit with a space
provided to designate the name of the client (customer/job), amount of
deposit, the client's trust liability account (From Account), a memo field
to describe the transaction and optional fields for method of payment and
class of transaction. Upon completing the deposit the client's ledger is
automatically updated. (See Figure 1)

DisbursingFunds

QuickBooks
provides the ability to either print checks on the computer or write them
manually. Whether you print a check or record the manually written check,
the client's ledger is automatically debited for the disbursement. In the
"Write Checks" window (Figure 2) there is a space provided in which you
designate the name of the client, a memo field to describe the transaction
and field for the date, payee and amount of the disbursement. Upon completing
the check form (Figure 2) the client's ledger is automatically updated.

Reports

Client LedgerAfter
the deposits and checks are properly entered, reports are printed which
display the type of transaction, date, amount, payee, source of deposit,
purpose of the transaction (memo) and balance of funds held for the client.
This report is known as the Client Ledger (Figure 3) and is a customization
of the "Transaction by Customer" report.

Client Trust JournalThe
second report printed is the Client Trust Transaction Journal which is
a customization of the "Transaction by Date" report. This report lists
all transactions in the client trust account. The aggregate balance of
each individual Client Ledger should equal the balance listed in the Client
Trust Transaction Journal. If they to not agree it is an indication of
an error in recording one or more of the transactions. You must reconcile
and correct these errors to comply with the state bar rules. (See Figure
4)

Bank ReconciliationMonthly
bank reconciliations are almost effortless. After all transactions are
entered you select the "Reconcile" activity and complete the following
screen (Figure 5). All that is required is simply to mark those items which
appear on the bank statement and enter the state bar IOLTA interest
credited and remitted.

IOLTA InterestInterest Income due to the State
Bar is accounted for each month when reconciling the trust bank account.
A separate sub-account is set up for the IOLTA Interest received and paid.
These amount are calculated and reflected on your bank statement.

Property Account Journal ReportA property account journal is merely
a list of all property received on behalf of a client and held in trust.
It is possible to set up a journal in QuickBooks for this purpose by creating
a "Other Current Liability" account for each client, however, it would
be simpler to use your word processor or spreadsheet to create this list
to report other property held in trust.

ConclusionIf a state bar investigator calls
you will be pleased to know that you can fully comply without delay by
using QuickBooks for your client trust account record keeping. And if you
are diligent, you should never again worry about issuing an overdraft check
on your client trust account.

You may obtain the manual and template for
client trust accounting for QuickBooks by sending your name, address, and
phone number with a $50 check payable to

White, Zuckerman, Warsavsky &
Luna

14455 Ventura Boulevard, Third
Floor

Sherman Oaks, CA 91423

For more information please call:

Myer Sankary (310) 208-2236
or Dean Atkinson (818) 981-4226.

Biographies:Myer J. Sankaryhas been a member
of the bar since 1966 and is a solo practitioner in Studio City and Westwood
who specializes in litigation and business transactions, corporate formations,
estate planning and probate. He is a graduate of Harvard Law School, 1965
and is currently Secretary-elect of the Executive Committee of the General
and Solo Practice Section of the State Bar of California. He is also Co-chairman
of the Section's Mentor Program.

Dean Atkinsonhas been a Certified
Public Accountant since 1980. He is currently a Partner in litigation services
with White, Zuckerman, Warsavsky & Luna Certified Public Accountants.
He has been involved in personal computer consulting since 1985 and has
conducted training presentations for computer applications, accounting
and litigation subjects.